Feldstein: Tax Rebate Was a Flop

The tax rebate enacted by Congress to stop a recession in the United States was a flop, Harvard University professor Martin Feldstein wrote in a Wall Street Journal editorial.

Only between 10 and 20 percent of the rebate dollars were spent, according to government statistics. Some had hoped that 50 cents of every rebate dollar would be spent by consumers.

"The evidence is now in, and that optimism was unwarranted. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity," Feldstein wrote.

With most of the rebate checks cashed, it is obvious the plan failed, he said. Consumer confidence in the economy was not boosted by this fiscal bailout idea.

Instead, the rebate plan backfired. It only added about $20 billion to consumer spending, while about $80 billion was added to the national debt.

In the second quarter, $78 billion in tax rebates were sent out. Data show that most consumers used their tax rebate checks to pay off their debt or saved the money.

"The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15 percent of the lost revenue," Feldstein said.

"The evidence of a very limited effect on spending is also clear in the monthly retail sales, a measure that is narrower than total consumer outlays because it excludes things like utility bills and rent. Retail sales were $342 billion a month in January through April and rose to only $346 billion in May and June."

Democratic presidential nominee Barack Obama's proposal to distribute $1,000 rebate checks to low- and middle-income workers will cost $65 billion and is likely to have the same result as the failed tax rebate plan, Feldstein wrote.

Obama's plan is to finance those rebates with an extra tax on oil companies would only result in higher oil prices, he said.

Since the government's plan flopped, Obama's plan will also fail to stimulate the economy, Feldstein wrote.

The rebate checks would do "little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion Obama proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1 percent of GDP."

The tax rebate enacted by Congress to stop a recession in the United States was a flop, Harvard University professor Martin Feldstein wrote in a Wall Street Journal editorial.Only between 10 and 20 percent of the rebate dollars were spent, according to government...